Dropping Company Coverage

We are dropping coverage on NFI Group Inc. (NFI). This company has tempted us before with a rating downgrade, but we opted to wait a few quarters to assess if its fundamentals improved, however, this has not been the case. It has high debt loads and inconsistent cash flows, and its debt is now more than five times the highest annual cash flow of the last decade. Its risks remain high, and NFI has a long way to make itself buyable again. As a result, we are dropping coverage on this company.  

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Report Updates

We have posted report updates on Tecsys Inc. (TCS), Shopify (SHOP), and Aritzia (ATZ). SHOP is a leading global commerce company that provides essential internet infrastructure for commerce. ATZ is an apparel company that designs and sells a wide variety of apparel and accessories, including t-shirts, sweaters, blouses, bodysuits, jackets, etc. TCS provides cloud-based supply chain services for a number of industries across North America. One company has seen encouraging improvement in the expansion of one of its key industries, another has been refocusing on cost efficiency and attaining a lean operating structure, while the other company has been seeing a slowdown in revenue growth and profitability. We feel that these are three critical reports to check out. 

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Investor Sentiment Survey - RESULTS!

Thank you to all those that participated in this past market update's Investor Sentiment Survey. We have published the results from the survey in a report in the link below. Please note that the weightings and categorization of these results are still a work in progress, and the model(s) used to analyze the results may change over time as more data comes in.

The investor sentiment score has bounced back since the most recent score of 42/100 to now 49/100, just below the 'bullish' threshold. Investors have shifted their sentiment from a bearish stance to a more neutral to bullish outlook, and expectations for an all-time high have inched towards a one-year timeframe from a previous three-year timeframe. Investors have also reduced their cash positions from the 25% to 100% ranges into the 0% to 25% buckets. 

Survey Results

We look forward to releasing another round of the Investor Sentiment Survey at the next market update!

Market Update

The markets have been moving lower over the past few weeks as investors take in corporate earnings results so far. Certain mega-cap stocks have posted better-than-expected results with increased guidance, while others were mixed and sunk lower. Fitch cut the US credit rating to AA+, which sparked the drawdown in equities. More recently, Moody's downgraded the credit ratings of several small to mid-sized US banks, a move which comes amid concerns over the credit strength of the banking sector. US inflation will be released this Thursday, and economists are expecting a slight uptick in the year-over-year rate compared to the prior month. In this market update, we compare the market's recovery since late 2022 against historical market recoveries. 
 
Stairs Up, Elevator Down?
This recent market correction of 2022 and subsequent recovery has been a unique one, in that the typical saying goes ‘stairs up, elevator down’, however, this one felt more like ‘elevator up (2021), stairs down (2022), elevator up (2023)’. The whipsaw action can leave investors with emotions of uncertainty as to whether valuations are cheap, overvalued, or if the economy is contracting, expanding, etc. However, one thing is certain, there are only so many market drawdowns of the magnitude that we witnessed in 2022 throughout history, and all of the market recoveries look fairly similar – up and to the right.
 
Historical Instances of Major Drawdowns in the Markets
First, let’s take a look at the periods of drawdowns that we will be looking at across the Nasdaq index, the S&P 500, and the TSX. The Nasdaq saw a 35% decline in 2022, thus we are looking at market instances where the Nasdaq saw declines of 30% or more. Specifically, the periods where the bottom of the market took place are 1987, 1990, 2002, 2009, and 2022. For the S&P 500, it saw a 25% decline in 2022, and thus we look at all 25%+ declines throughout history, being similar years to the Nasdaq. For the TSX, its maximum decline in 2022 was not that significant (18%), but we have compared all market recoveries from a market correction of 15% or more in the TSX’s history. In the table below we highlight the maximum drawdowns from the periods that we will be analyzing in the sections later in this update.

Source: 5i Research, Koyfin
  
Historical Nasdaq Recoveries
Now, into the fun part of the analysis. In the chart below, we have compared the two-year market recoveries for the Nasdaq following the bottom of a 30%+ decline. For example, the Nasdaq bottomed in March of 2009, and its subsequent market recovery is highlighted in black below, attaining a 120% cumulative return in the two years following the bottom of 2009.
 
For the 35% decline that we saw in 2022, the bottom was reached in November, which has since climbed ~43%. For ease of viewing the recoveries, we smooth out the day-to-day movements by using a one-month average. Reviewing the recovery from November 2022 to today, we can visually see that it is fairly in line with previous market recoveries following large drawdowns, and it is in fact slightly behind the average increase by this point in time (+56%). The average cumulative return for all major declines in the Nasdaq at the one-year mark is 68%, and at the two-year mark is 92%. Currently, we are roughly eight months into the recovery and are at a cumulative return of ~+43%. All in all, things seem to be progressing fairly on schedule.

Historical S&P 500 Recoveries
Next, shifting to the market recoveries in the S&P 500 following a 25% decline or more. The S&P 500 saw a 25% decline in 2022, and we are using the market bottom from November 2022 as our starting point for the market recovery. Again, we smooth out the returns using a one-month average, and so far the S&P 500 has recovered ~26%. Following the market bottoms of a 25%+ drawdown in the S&P 500, the market returned 44% on average by today’s equivalent point in time, 53% at the one-year mark, and 72% by the two-year mark. Once again, the recovery in the S&P 500 seems to be orderly and in line with prior recoveries of major market drawdowns.

Historical TSX Recoveries
Lastly, we review the market recoveries of the TSX following a 15%+ decline. The TSX did not see quite the precipitous decline that the Nasdaq and the S&P 500 saw in 2022, standing at only an 18% maximum decline. For this analysis, we use all instances of a 15%+ decline in the TSX, and its subsequent two-year recovery. So far, the TSX has increased ~11% from the market bottom, and this is on track, or even slightly behind the average market recovery. Although, as we can see in the first table of the update, 2022 was one of the softer market drawdowns for the TSX historically, and this can help to explain its lackluster recovery compared to other recovery periods.

Overall, what we look to accomplish in this market update is to compare the current market recovery following a large drawdown against previous recovery instances and assess if we are severely overheated or below average, and the results have shown that this recovery is in line with previous instances.
 
In drawing these conclusions, however, there are two primary assumptions that we are making that an investor will need to decide if they are in agreeance with; the first is that the market bottom truly occurred in 2022, and the second is that these recoveries are justifiable despite being softer drawdowns than previous instances. Aside from these two main assumptions, we feel that despite the strength of this market recovery in 2023, placed in context with previous recoveries, all seems logical and orderly thus far.

Best wishes for your investing!

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